New '89-11' loophole to avoid real estate tax pops up
By Sam Spatter
Published: Saturday, Dec. 29, 2012, 12:01 a.m.
Close one loophole and another opens.
Pittsburgh and school district officials, along with state Sen. Jim Ferlo, D-Highland Park, want to end a practice that enables an investor to buy an entity owning a single building, instead of the real estate, without recording the change in ownership.
“We plan to sit down in January ... to work out a solution to this practice that has caused the loss of millions to the city and school district,” said Ira Weiss, the Pittsburgh Public Schools solicitor.
The rise in use of this “one-building” loophole follows the closing of another this year by the state legislature.
Ferlo considers the elimination of the “89-11” loophole “a major victory,” though he wanted it to take effect before the scheduled date of Jan. 1.
That loophole in the state tax code allowed buyers of office buildings to avoid paying real estate transfer taxes by purchasing 89 percent of a building. After three years, the buyer could purchase the remaining 11 percent.
Ferlo said he and Weiss will meet with city Controller Michael Lamb to devise a strategy to close the new loophole. It might be tougher to accomplish because he believes Republicans controlling the legislature are not concerned about holding companies owning properties.
“But legislators, regardless of party, are interested in tax fairness, tax equity and tax uniformity,” Ferlo said.
Lamb noted that “every time we close a loophole, the buyers find another loophole.”
Weiss pointed to the recent purchase of EQT Plaza, Downtown, by Highwoods Properties Inc. of Raleigh and the recent sale of the Del Monte Building on the North Shore as examples. Buyers purchased the entity owning the buildings and avoided paying tax.
Highwoods acquired 100 percent of the EQT Plaza owner, Liberty Avenue Mezzanine LLC, a Delaware holding company. It paid $99.2 million, including $8 million toward making improvements, according to Highwoods CEO Ed Fritsch.
If transfer taxes had been required, they would have totaled $3.97 million. The state would have reaped about $992,000; the city, $1.98 million; and the school district, $992,000.
“The only way to acquire the building was to buy the holding company. There was no deed for us to acquire,” Fritsch said.
An 89-11 transaction was used in the Del Monte sale, although Barry Ford, vice president for development for Continental Real Estate Cos., said only that KKR, a New York based investment company, acquired a portion of his firm's ownership interest, which is how 89-11 works.
Lamb said lawmakers need to look at how investors escape paying transfer taxes by buying a company set up just for the purpose of owning one building.
“We want to work with the state legislature to close this loophole but not stop a legitimate sale that meets the law that permits nonpayment of transfer taxes,” he said.
A legitimate sale would include government purchase of property for its use, a lender acquiring a property on which it foreclosed at a sheriff's sale, or the purchase of a note on a building “in lieu of foreclose.” Gifts and dedications of real properties to universities are tax-exempt, but if universities sell properties — even to each other — that sale is taxable.
Ferlo was a leader in persuading the state legislature to close the 89-11 loophole. It was used in the 2010 purchase of the 64-story U.S. Steel Tower, the region's tallest building, by a group of New York-based investors headed by Mark Karasick, who paid $250 million for the building but paid no transfer taxes.
The Jan. 1 deadline on closing the 89-11 loophole resulted in several purchases of buildings in Pittsburgh, officials said.
Sam Spatter is a staff writer for Trib Total Media. He can be reached at 412-320-7843 or firstname.lastname@example.org.
Show commenting policy
TribLive commenting policy
You are solely responsible for your comments and by using TribLive.com you agree to our Terms of Service.
We moderate comments. Our goal is to provide substantive commentary for a general readership. By screening submissions, we provide a space where readers can share intelligent and informed commentary that enhances the quality of our news and information.
While most comments will be posted if they are on-topic and not abusive, moderating decisions are subjective. We will make them as carefully and consistently as we can. Because of the volume of reader comments, we cannot review individual moderation decisions with readers.
We value thoughtful comments representing a range of views that make their point quickly and politely. We make an effort to protect discussions from repeated comments either by the same reader or different readers.
We follow the same standards for taste as the daily newspaper. A few things we won't tolerate: personal attacks, obscenity, vulgarity, profanity (including expletives and letters followed by dashes), commercial promotion, impersonations, incoherence, proselytizing and SHOUTING. Don't include URLs to Web sites.
We do not edit comments. They are either approved or deleted. We reserve the right to edit a comment that is quoted or excerpted in an article. In this case, we may fix spelling and punctuation.
We welcome strong opinions and criticism of our work, but we don't want comments to become bogged down with discussions of our policies and we will moderate accordingly.
We appreciate it when readers and people quoted in articles or blog posts point out errors of fact or emphasis and will investigate all assertions. But these suggestions should be sent via e-mail. To avoid distracting other readers, we won't publish comments that suggest a correction. Instead, corrections will be made in a blog post or in an article.
- Minorities crucial to filling Marcellus shale gas drilling jobs
- Regular or Roth? Pick either
- Municipal bonds do another about-face
- Achieving proper credit balance
- CVS suit could be test case
- Harsh winter sets back Western Pa. maple harvest
- Real estate goes techno
- ‘Boomerang’ buyers get another chance at homeownership
- Prepaid cards start to elbow aside bank accounts
- Diaper makers do due diligence
- Cabbies protest ride startups